What are the Different Types of Tax Waivers?

Tax waivers — declarations that no tax is owed — are issued by a government for a wide variety of reasons, such as to relieve certain homeowners from having to pay property taxes on their homes, or to permit the transfer of securities from the estate of someone who has passed away. Tax waivers are also sometimes issued by employees of some states on official business, relieving merchants with whom they do business from the responsibility for adding sales taxes to their purchases and remitting those taxes back to the government. Tax waivers are different from tax credits in that tax credits are a reduction of taxes owed, while tax waivers are a negation of taxes entirely.

Just as governments sometimes use the tax code to encourage certain financial behavior, they sometimes use the tax code to reward past behavior. In many American states, senior citizens and veterans receive full or partial waivers for their property taxes. Likewise, most states require an estate tax waiver before any property can be released from the estate of someone who has died. The waiver is obtained by applying to the appropriate state revenue or tax department. This waiver, sometimes called an inheritance tax waiver, an estate tax waiver, or a release of lien, affirms that any taxes due on the estate have been paid, and authorizes the holding institution, such as a bank or brokerage, to release the property. When the property is real estate, the waiver permits the sale of such property and the recording of the sale.

Property tax waivers are fairly common throughout the United States, because most governments issue them to religious organizations and to not-for-profit organizations such as educational or charitable enterprises. These organizations cannot simply refrain from paying the tax, however; they must apply for the waiver and submit it annually when property taxes are due. Some not-for-profit organizations are sometimes denied waivers because they’re primarily fraternal or social in nature, and their charitable activities are not their main activity.

A controversial use of tax waivers is as an incentive to attract employers, residents or investors to an area. For example, it’s a common practice in the United States for states and counties together to offer tax incentive packages, including temporary waivers, to businesses contemplating relocation into an area, and sometimes as a retention incentive to those contemplating moving out. The justification is that the jobs the employer will give to local residents will generate income tax and sales tax revenue for the state and county, enough to cover the actual direct and indirect costs incurred by the employer’s relocation to the county, during the period the waivers are in effect. The controversy derives from the fact that the infrastructure must often be built out to accommodate a new business, but the waivers at best mean that for some period of time, the new business won’t be generating any tax revenue.

An interesting use of tax waivers is by states that use them to reduce their cash flow requirements. State employees traveling in the state on official business are provided waivers for sales tax that they present to hotels, motels, restaurants and other companies with which they do business. The sales are made tax-free, and the company includes the waiver with its sales tax return. The state, in its expense accounting and reimbursement process, reimburses employees the reduced amount, reducing its expense reimbursement obligation. While sales tax revenues are obviously reduced by the same amount, the state’s cash flow is no longer encumbered with the reimbursement of employees for sales tax that would have been paid right back to the state.